Oceaneering International Inc (OII) 2008 Q2 法說會逐字稿

Good morning. My name is Nakisha and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter earnings conference call. (OPERATOR INSTRUCTIONS) Thank you, I would now like to turn the call over to Mr. Jack Jurkoshek. Thank you; sir, you may begin your conference.

Good morning, everybody; I'd like to thank you for joining us on our 2008 second quarter earnings conference call. As usual, a webcast of this event is being made available through the Company Boardroom service of Thomson/CCBN.

Joining me today are Jay Collins, our President and Chief Executive Officer, who will be leading the call this morning; Marvin Migura, our Chief Financial Officer; and Bob Mingoia, our Treasurer.

Jut as a reminder, remarks we make during the course of the call regarding our earnings guidance, business strategy, plans for future operations, and industry conditions are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. And I'm now going to turn the call over to Jay.

Thank you, Jack, and good morning. Thanks for joining the call. It's a pleasure to be here with you today. We achieved record second quarter earnings, which were above the midpoint of our guidance range, and reflect the high demand we are experiencing for our Subsea Services and Products.

Net income of $52.1 million was higher than the second quarter of 2007 and over 25% above that of last quarter. Year-over-year earnings increased due to growth in ROV, Subsea Products, and Inspection operating profits. The sequential quarterly income improvement was broad-based, as all six of our business segments contributed. Our ROV and Inspection businesses achieved record quarterly operating income results.

We continue to expect to achieve a fifth consecutive record year of EPS in 2008 in the range of $3.45 to $3.65. At the midpoint, our guidance range is down less than 3% from what we indicated previously. We have lowered our annual Subsea Products operating income growth expectations to $15 million to $20 million, from $25 million to $35 million. This revision to our products growth estimate is a result of a combination of events that have happened and our expectations for the second half of 2008.

These events include the following -- Subsea Products contributed lower than expected operating income in the second quarter. At the end of June our backlog, although up 5% from the end of the first quarter, was lower than we expected. While we anticipate improving operating income margin for the second half of the year, we no longer expect our annual margins to be higher than those achieved in 2007.

Even with the lowered earnings growth rate for Subsea Products, the midpoint of our guidance would equate to 19% year-over-year growth for this segment. The underlying fundamentals are unchanged and we definitely like our position in this market.

This segment's operating income during the second quarter improved sequentially and year over year by more than 20%. These improvements were attributable to higher throughput in our multiplex umbilical manufacturing plants and increased sales of our specialty products, particularly ROV tooling.

While we had a good second quarter and were bullish about our long-term outlook, we did not achieve an improvement in operating results to the extent we had projected and we did not grow backlog as much as we planned. We realized a lower-than-anticipated operating income margin during the second quarter due to higher development costs on BOP control systems and lower utilization of our IWOCS fleet.

The BOP controls cost overruns were attributable to higher engineering and manufacturing costs incurred on the components for the first two systems that we are in the process of delivering. The higher BOP control costs will be with us through the delivery of these initial systems and will therefore also impact our second half results.

While the lower contribution from the new product line is certainly disappointing, we are pleased with the progress of our capability to deliver this new product, especially in the light of increasing demand for BOP controls, as underscored by the new floating drilling rigs on order.

The lower IWOCS utilization was due to lower-than-anticipated market demand for tree installations work-overs and plug and abandonment activity and we're not projecting a significant increase in this segment of the market during the last half of the year. Additionally, we're expanding our area of operations to include the UK and West Africa, and the cost of establishing these service bases and training of personnel has been higher than we anticipated.

On a general note, we believe our sector of the greater Subsea Products market continues to be plagued with project delays and over-all lower level of activity than we would otherwise expect in a booming deep-water and subsea completion market. As evidence of this phenomenon, Quest Offshore's latest umbilical forecast indicates that only one-third of the orders expected for 2008, as measured by length, were placed in the first half of the year. Our umbilical order share in the first half was about 25%, in line with our average market share over the past five years.

Along with the lower-than-expected level of umbilical orders industry wide comes more aggressive competitor pricing on near-term jobs and lower profitability on existing work because of the costs associated with excess plants and labor capacity. Nevertheless, based on our scheduled and expected work load, we are projecting a substantial increase in umbilical throughput for the second half of 2008.

At the end of the quarter, our products backlog was $372 million, and included the $40 million umbilical contract I mentioned as a letter of intent on the last call. This level of backlog represented a 5% increase from the end of March.

On a positive note, bid activity remains at a high level. However, due to the lack of visibility on timing in the placement of orders, we're not forecasting our Subseas Products backlog to grow during the last half of this year.

Taking into consideration our over-all assessment of where we are six months into 2008 and our second half outlook, we believe that while our annual operating income growth will be substantial, our margins on Subsea Product sales for the year 2008 will not be higher than 2007. We do believe our margins in the second half of the year will be better than those achieved in the first half.

Moving on to ROVs, our ROV business achieved record quarterly operating income as we obtained an all-time high average revenue per day on hire of approximately 99.50 per day. Sequentially, operating income rose nearly 10% as we improved pricing, increased vehicle days on hire. Our fleet utilization was 84%, up 4% from the first quarter. Year-over-year operating income was over 20% higher, due primarily to higher average revenue per day on hire. Year to date, ROV operating income margin was 29%, 3% better than the first half of 2007.

In light of this performance and an improved outlook for the second half of this year, we're raising our ROV annual operating income growth range by $5 million. We now project growth in the range of $35 million to $45 million.

During the quarter, we added five systems to our fleet and disposed of three, for a net growth of two vehicles. At the end of June, we had 214 systems available for operation, up 12 from June a year ago. We still anticipate adding approximately 30 new systems to our fleet this year, 23 in the second half.

Our fleet mixture in June was 61% in drill support and 39% in construction and field maintenance. This compared to 65/35 mix in March of this year and 67/33 mix in June 2007.

In summary, our ROV performance has been exemplary and its outlook remains very bright.

As expected and discussed in our last earnings conference call, our Subsea Projects business sequentially improved during the quarter due to a normal seasonal increase in demand for diving and deepwater subsea equipment installation and inspection, repair, and maintenance services. Operating income increased by more than 55%.

Year over year, Subsea Projects' operating income declined, as expected, due to a softer market for our services as a result of substantial completion of work associated with hurricane damage. During the quarter, we secured a contract for the fabrication and installation of subsea hardware on Shell's ultra deepwater Perdido Regional Development project. It's estimated that it may take a couple of years to complete our Perdido work scope. The project is but one indication of the high level of future market demand for deepwater subsea installation activity in the Gulf of Mexico.

Our commitment to add the Olympic Intervention IV to our vessel fleet was instrumental in our success in securing this Perdido contract. The vessel has been delivered to us in Norway on schedule; it is beginning its mobilization to the Gulf of Mexico today. We still anticipate that this boat will be available for service by early in the fourth quarter of this year.

As noted in the press release, our Subsea Projects operating outlook for the second half of the year is to achieve results comparable to the first half.

Our Inspection segment had its best quarterly performance ever. This was attributable to market demand growth and our success in securing new contracts, providing more value-added services, and increasing pricing. Sequentially and year over year, Inspection operating income increased by nearly 25%. Sequentially, Inspections' operating income increased primarily as a result of increased demand in the UK, which was attributable to refinery, petrochemical plant, and power station shutdowns. The year-over-year improvement was largely the result of our success in securing new contracts for services in LNG storage in petrochemical facilities and pipeline work.

I'm now going to turn the call over to Marvin to discuss our cash flow, capital expenditures, and balance sheet.

Thank you, Jay. Good morning, everybody. If you add depreciation back to our net income, we generated nearly $80 million in cash flow in the second quarter, which is 13% more than the second quarter of 2007. If you add depreciation back to our operating income, you get $109 million, up 10%. So however you choose to measure our cash generation, you'll find an increase over last year's results.

Capital expenditures during the quarter totaled $58 million. These investments were predominately for upgrading and expanding our ROV fleet and our Subsea Products manufacturing facilities. Over 90% of our investments, both during the quarter and year to date, have been in our ROV and Subsea Products operations.

At present, we anticipate spending about $250 million in capital expenditures in 2008. The remaining projected expenditures of approximately $100 million consist mainly of additional ROV fleet growth and organic growth investment in Subsea Products. Above and beyond this expected level of capital expenditures, we continue to look for additional accretive acquisitions and organic growth opportunities with better than cost of capital returns.

Primarily, we intend to use our strong cash flows and balance sheet to further grow our earnings. To the extent we do not find suitable investment options, we intend to pay down our debt.

Our balance sheet remains in excellent condition. At the end of June, we had debt of $227 million and equity slightly over $1 billion. Our debt-to-cap percentage was 18%. Now I'll turn the call back over to Jay.

Thank you, Marvin. In summary, our second quarter performance over all was in line with what we had anticipated, and we're looking forward to achieving record EPS performance in 2008 for the fifth consecutive year.

Our focus on providing products and services for deepwater and subsea completions positions us to participate in a major secular growth trend currently underway in the oilfield services and products industry. Looking forward, we see specific signs of a healthy deepwater and subsea market that will drive demand growth for our services and products in 2009 and beyond.

During the quarter, Petrobras announced that they intend to hire an additional new 40 floating rigs by 2017. Transocean recently announced a five-year contract, commencing in 2010, on a new build rig for use in the Gulf of Mexico and 22 rig years of contract extensions on four existing floating rigs, commencing in 2009 to 2011 time period. Over 95% of the existing 2006 floating rigs in the world were under contract and over 70% of these are contracted through 2009.

100 additional floating rigs either have been or are scheduled to be delivered during 2008 through 2012, and 76 of these have been contracted long term. During the second quarter, 21 new rig orders were placed, 12 on the strength of long-term contract awards, led by Petrobras. 26 ROV commitments have been made on the contracted rigs, and we have won 23 of them and will provide 27 vehicles on these jobs.

According to an international ship broker, there were about 200 subsea support vessels under construction, with anticipated delivery dates by the end of 2011. Of these, we estimate that at least 135 will likely require at least one ROV each.

Based on Quest Offshore's latest average forecast, during the next five years subsea production tree orders will average 630 per year, and annual demand for umbilicals will be about 3200 kilometers. These forecasts represent increases of approximately 60% and 110%, respectively, over the last five years; that's more than a doubling of umbilical demand.

With our existing assets, we're well positioned to supply a wide range of the services and products required to support the growing deepwater exploration, development, and production efforts of our customers.

Furthermore, we plan on making additional organic growth and acquisition investments to expand our ability to participate in this market. We've been successful in reinvesting our cash flow for the past several years and are well on our way to doing the same in 2008. As Marvin previously mentioned, at the end of June, our debt to cap was 18% and we remain committed to using our resources to continue to grow the Company. We believe Oceaneering's business prospects over the next several years are very promising.

For 2008, we expect our net income to result in record EPS of $3.45 to $3.65. We continue to anticipate growth in annual earnings over 2007 to be led by operating income improvements in Subsea Products and ROVs. For the third quarter of 2008, we are projecting EPS in the range of $0.90 to $1.00. Sequentially, we expect quarterly operating income improvements from ROVs as we put new vehicles in service, continue to improve average pricing, and increase our over-all fleet utilization rate; and Subsea Products on the strength of higher umbilical manufacturing plant throughput.

We expect sequentially quarterly declines in profit contributions from MOPs due to the second quarter sales of the San Jacinto and Subsea Projects, largely as a result of costs we will be incurring to mobilize the Olympic Intervention IV to the Gulf of Mexico to complete its final outfitting for service.

In summary, our quarterly results continue to demonstrate our ability to generate excellent earnings and cash flow. We believe our business strategy is working well for both the long and short term. Our technology gives us operating leverage to take advantage of the high level of deepwater and subsea completion activity currently underway. The market outlook for our deepwater and Subsea Service and Products offerings is excellent. We continue to believe we are in one of the sweet spots of this up cycle. We're expecting record annual earnings for the fifth consecutive year in 2008, and with escalating demand for ROVs and Subsea Products, 2009 should be even better.

We appreciate your interest in Oceaneering and we'll be pleased to answer any of your questions.

Nakisha?

(OPERATOR INSTRUCTIONS) Your first question from the line of Jim Crandell.

Good morning, everyone.

Good morning, Jim.

How are you?

Jay, there's been delays in subsea tree orders, but it seems that the delays in umbilical orders are much greater. Can you-- I have a twofold question. One, can you give us some specifics in terms of projects that went into your forecast early in the year where you expected umbilical orders that look to be delayed? And then give your thoughts on why they are being delayed in each case?

Jim, we continue to try to understand the time interval between tree orders and umbilical orders and I'm not sure that we fully understand that. I think that the tree order certainly is placed, we think, earlier in the process. The umbilical order tends to be more part of the installation process and I guess one thing that we've learned is that the umbilical will connect all the pieces subsea together. So as long as there's any design changes, any issues going on about the architecture of the subsea field or what vessel will do the installation, people really don't want to order the umbilical. So that seemed to be continuing to delay the umbilical orders longer in the cycle than we would have imagined.

So every project that was on the drawing board or that was being planned at the beginning of the year, as far as you know, is still out there?

Right. We do not see cancellations on our list, so the projects are still there. Amazingly enough, our year outlook is the highest total that we've seen in the last-- really, ever. So we see more activity-- like the Quest forecast, we see more activity looking out a year, but we just don't have the orders yet.

So your salespeople in conversations with the customers, Jay, are they coming up with any reasons for the delays? I know you cited to me not too long ago there was some debate about whether to go with steel or thermoplastic, and there seems to be some other issues as well. Can you maybe expand on that?

Well, we-- one example, we thought it was time for an order to be placed. In recent conversation with the customer -- this was a month ago -- they decided to change their mind, to go from thermoplastic to steel. We recently saw an order that switched from thermoplastic to steel very late in the process. So with these kind of engineering switches going back and forth, it just indicated to us that, hey, this order was not ready to be placed. There was considerable engineering and thinking going on at the oil company level. And until that gets resolved and everybody's happy with it and how everything's going to be connected in the architecture, the umbilical's not going to get ordered.

Just to add a little bit of information to that -- even on an order that we had, that we have, and that we were getting ready to start processing, the customer put us on hold and said they wanted to make some slight tweaks to the design and wanted to do that before we started the work. So an order that we have in backlog, at the very end of June we were given a hold order on. Not that they're going to change the order much, but they wanted to change the design before we started doing the manufacturing. So there seems to be a lot of redesign and rethinking and continual engineering that we're experiencing that's causing some of these delays.

That's a good point, Marvin. We're aware of one of our competitors that had a significant order that they were about to start on, and the project got delayed for six months. They had a significant hole in their factory and they became a much more aggressive bidder.

Jay or Marvin, is there a geographic focus or commonality on some of the projects that are delayed which is making, let's say specifically any of your manufacturing facilities run much less efficiency because of lower utilization now?

I don't think so, Jim. We've seen both in Brazil and the Gulf of Mexico and West Africa, so I think it's occurring all over the world.

Okay. Last question, and just to switch to the ROV side for a final question -- your utilization was up from 80 to 84% in ROVs this quarter, which is improved, but still probably a bit less than you expected going into the quarter, but a little bit less than I expected. I know the reason for the drop in the first quarter related to slower ramp-up in some construction projects in the Gulf and the North Sea. What do you attribute the second quarter to?

I think some of that slow startup of construction market in the Gulf of Mexico certainly occurred in the start of the second quarter as well. Other than that, I think rigs just moving around the world -- getting in position is the only other thing I have to put forth.

And would you look for the utilization side to improve to let's just say last year's second half levels of utilization in the second half of this year?

I think we do, Jack.

The answer's yes; yes.

Jim -- yes, we do; that would be our expectation.

Okay; thank you very much.

You bet.

Thanks.

Your next question is from the line of Neil Dingmann.

Morning, guys.

Morning, Neil.

Just looking, Jay, on your comment on the Subsea Projects, as far as the margins now being, I guess, rather flat or maybe down a touch versus last year -- is that just because of delays you're seeing or could you maybe give a bit of color on that? I'm just a little surprised, even if we do see delays, that margins would still not creep up just a bit.

Jay Collins; I'm sorry, Neil -- are you talking about the products business?

Correct.

Jay Collins; Well, I think our margins really relate to the BOP business that we talked about, the excess costs that we're having in developing this new product line. And that will continue through the second part of the year. These costs on this BOP really relate to engineering and manufacturing cost overruns that we have incurred and will incur as we complete the components for these first two systems that we're delivering this year. This is both excess engineering, rework that we had to do on engineering and manufacturing, and a couple of costly vendor mistakes that we incurred. Simply stated, we just should have done a better job estimating and executing on these projects.

We do expect the profitability on the remaining two systems that we have in our backlog that we'll deliver next year-- for that profitability to improve substantially.

The other issue was our IWOCS business, where we said we had a lot lower utilization. We started off slow for the year in the first quarter. April and May looked like things were improving and then June was below our expectations. As we looked hard into our forecast, we concluded that we were going to stay below our projected utilization for the whole year. Really, we've seen pretty flat drilling activities in the Gulf of Mexico this year. I think we were just too optimistic in our expectations for that business.

Hopefully that answers that for you?

That does; that's very clear, thanks. And then, on the Subseas Projects, I was wondering -- are you winding down now as far as hurricane-related work-- is that sort of winding down? And to go along with that, your comments as far as what you've seen on the products side, the highest-- I think you said the highest outlook ever, at least for a year out. Are you seeing some large orders further out on this type of business as well?

Other than the Perdido contract, we really aren't seeing far out long term-- it seems to be a relatively short-term basis, six months in advance, I think as far as we've booked much work. And we are not doing-- I'm not aware of much hurricane work that we're doing at the moment. I think we're pretty much through with most of that, a little bit continuing to go on. And we've certainly seen a lot more competition and just a general reduction of activity in the Gulf of Mexico in both the diving and projects side in the first half of this year.

Okay. I'd like to sneak one last one in -- as far as on the ROVs, you foresee, I guess, let's say the next 12, 18 months as far as the number that you'll continue to turn out, about the same as what it's been?

That's correct. We continue to build ROVs at about the same pace that we have been. I think we've been-- we said we were going to put 30 units to work this year and we'll have some retirements. And we're continuing to build, obviously, for this year and for next year. Actually, next year's a very strong year for new rigs going to work.

Yes, I think the same annual rate. We really are back-end loaded for this year, with 23 expected of the 30 in the second half.

Okay. As those newer ones, I guess the 23, would come on, what type of rate on those-- I guess is it fair to say all ROVs across the board are getting around the same rate, or is that not necessarily the case?

No, I think every unit is priced differently; each one has different characteristics -- tooling, water depth, and perhaps even length of term. So I think they're all-- there are differences in all of them.

And all we're going to say, Neil, is that it'll be reflected in the day rate that we give out quarterly.

Okay; perfect. Thanks, guys.

You bet.

Your next question is from the line of [Mark Thomas].

Morning, guys.

Hello, Mark.

Morning.

Jay, can you just talk about the worldwide manufacturing capacity for umbilicals today and maybe compare that to two or three years ago?

Certainly for Oceaneering, we have ramped up our ability to compete in the steel tube business with our new factory in Panama City compared to three years ago. So that was the main reason for building that plant. We have expanded our capability in the North Sea by 50%. Increasing capacity in that facility increased our capability to do smaller steel tube jobs in that facility as well as increased our capacity in Brazil. So we think we're much better able to compete today across the range of the market, both thermoplastic and steel, than we were three years ago. We think the capability of all of our plants is improving significantly every quarter.

We do find ourselves, though, in a market that is oversupplied with capacity at the moment, given the lack of worldwide orders that we've seen in the last 18 months. So there is pretty heavy competition for orders around the world.

Are you seeing capacity continue to grow, though, today?

I haven't really seen any recent additions to that capacity, but-- hopefully, we won't see any.

Okay, thanks. And then you mentioned sort of a shift in preference between steel umbilicals versus thermoplastic. What causes a customer to look at making a decision for steel versus thermoplastic?

Often-- first of all, steel is generally more expensive. So it would most likely be used in deepwater, where people are concerned about crushing of thermoplastic tubes or making sure that the methanol injected into the well is not escaping into the ocean floor. And also for length. So the longer you get out, the more you need the steel tube.

Okay. And then, how much of your capacity is for steel versus thermoplastic, or can it switch?

You really can't split like that. Our plants can do-- Panama City can do both, UK-- all of our plants can do both to varying degrees, so it's kind of hard to split it out that way.

So it's interchangeable.

Thanks. And last question -- just turning to Subseas Projects Group. The contract sounds good for the Shell Perdido development. Just to make sure I heard you right -- did you say the contract will last two to three years to complete?

Right. Well, we're not working every day on that. But the Perdido is a big hub development. I don't know if you're familiar with their project -- it's about 200 miles south of Freeport in about 8000 feet of water, and the first phase will have 17 subsea wells produced over time; and there may be a phase after that. So we will work on the thing off and on over the next couple of years, and then perhaps even longer. So it's not a continuous-- a day after day after day contract, but it is a big field development that will go on for quite some time.

And does that contract call for you to have vessels on standby?

No; we're installing the jumpers.

As scheduled and as agreed.

Right.

Okay, great. Thanks, guys.

You bet.

Your next question is from the line of Stephen Gengaro.

Thanks. Good morning, gentlemen.

Morning, Stephen.

The question is really on the pricing and the market share side for the umbilicals. And what-- you gave market share data for the year; or at least, your belief for where your market share stands. When you say you're seeing kind of price competition, how bad is it? I mean, are you-- I know there's not as much work out there right now as people thought-- Are you seeing kind of material price erosion? And how should we think about that impacting margins, if at all?

I'd say it's spotty and unpredictable, which makes it difficult to bid in this market. As I mentioned earlier, we saw one of our competitors, we think, have a significant hole in their production capacity and they became very aggressive in the market to fill that capacity. So we're not going to give out bidding numbers, and it's certainly not across the board on every job, but it's spotty and it depends on what's going on in everybody's plant around the world. But if people are not full and they have holes in their plant, we can see some pretty aggressive bidding.

There was some news out yesterday that evidently at least part of the Block 31 job went to Aker. Do you have any comments on pricing of that job or whether you were involved?

No. We knew a year ago that that job would likely go to Aker Kvaerner -- they had done Block 18 for BP along with Duke, so that was not really on our target list. So no comment on that.

And then finally, as you look at the balance of this year -- and I know you've given kind of ranges -- are there areas where we could kind of think about you as being more and less concerned? I mean, I imagine you're probably more comfortable on the ROV side and still a little unsure on the products side. Is that a fair conclusion as far as the variables we're looking at?

I think clearly the ROV business has had less variation, and clearly we're able to predict the results in this business much more closely. In the product business, not only are we doing some new things like the BOP controls business, but we are subject to the timing of the orders in the marketplace. So I think that produces more uncertainty, and I guess that's what we're trying to make sure today that we provide you with the best information that we have going forward for the second half of the year.

Okay. No, that's helpful; thank you.

You bet.

Your next question is from the line of Joe Gibney.

Good morning, everybody.

Morning, Joe.

Hi, Joe.

Most of my questions have been answered. I just wanted to touch a little bit on the Inspection side. I wasn't sure-- I didn't hear that in your commentary relative to outlook for that business in the back half of the year. I don't see strength in the UK -- just a little bit of color there would be helpful.

And also, I'm curious on the Project side, seeing the Olympic Intervention IV secured for Perdido is certainly a positive. Just curious if you guys would look at additional deepwater charter vessels, given the strength of deepwater well intervention offsetting some of the typical seasonality you see on the project side? Appreciate it.

Let me take the back one -- we don't have any plans at the moment to charter any more vessels. With this new vessel coming in, really later this month, we think that'll really give us just what we need in the Gulf of Mexico, so we're not planning to charter any more vessels.

With regard to the Inspection business, clearly this has been a very good success for us and operates-- really has been a very steady business. But steadily going up. So we think-- our outlook for that business for this year and for next year is excellent. So we like that business and we are very proud of the success that it has.

And I do want to remind you, Joe, and I want to remind everybody, that in the fourth quarter, we usually get some-- not usually, we always get some seasonality in the UK work. So I think we've had some pull-through work where work got moved from the third quarter into the second quarter this year in Inspection. And just do want to remind you that we usually have some seasonality in the fourth quarter.

Okay, that's helpful; thank you. I'll turn it back.

Okay.

Your next question is from the line of Victor Marchon.

Thank you; good morning, everyone.

Morning, Victor.

The first question I had was just on the ROV mix. You've seen a pretty steady increase for the construction and field maintenance work for the ROVs over the last year. And just wanted to get your sense, as you look at the new equipment that's coming to the market over the next two or three years -- does that mix shift start moving higher-- back toward the drill support piece? Or is the sort of 61/39 split something that's going to be pretty consistent going forward?

I guess we have been surprised, really, at the strength of the construction market over the last three years since the drilling rig market started moving up. And with the 200 vessels that are on order out there, we think that mix is likely to stay around the same -- sort of in the range of two-thirds/one-third. We see plenty of opportunity on the vessel side -- just like in our own business, where we brought in two big North Sea vessels and each one has two ROVs on board. We're seeing that kind of opportunity in the North Sea and West Africa. So I think even as the rigs -- we see this rig growth coming forward -- we will see continued proportional growth in the construction vessel side.

Okay. And how would you look at that as it relates to pricing or average revenue per day? Because typically, if memory serves, the revenue per day for the construction work is higher than drill support but maybe a little bit less utilization -- is that a fair assessment?

You've got a good memory; that's exactly right. We'll have a bigger crew on a construction project -- instead of three men on drill support, we'll usually have three-man crew with occasionally a fourth person, while on a construction project we may very well have a six-man crew or even more. So we usually price a little higher, probably have a little more maintenance on that type work. So our revenue per day will be higher but we'll also have more dead time and lower utilization for the year.

But at the end of the year, we look back at the revenue and profits we've made on either type job is very similar. So I think you shouldn't make too much distinction there.

Okay. And (inaudible) just as it relates to Brazil and Petrobras -- knowing you guys' positioning there, both from an ROV and umbilical side, have you seen any change in the competitive environment in Brazil, whether it relates to the ROVs or on the umbilical side?

On the umbilical side, one of our competitors, Prysmian, owned by Goldman Sachs, has built a new umbilical factory over there over the last two years. So that probably is the only change on the competitive side. On the ROV side, we see no change. We have, by a slight amount, the largest market share -- about a third of the market -- with Subsea 7 close behind us. So we think that there's been no change in that market.

Okay.

We like that market and we intend to try to do as much of the Petrobras work as possible.

Okay. So recent market share for both businesses shouldn't really change that much going forward.

No, I wouldn't think so.

Okay, great. That's all I had; thank you.

You bet.

Your next question is from the line of Byron Pope.

Morning, guys.

Morning, Bryon.

Morning.

A question about Subsea Products segment. I'm trying to think through -- so we've got pricing issues, we've got some cost issues relating to the subsea BOP control systems. As we look farther out -- call it 2009, 2010, if you want -- is there anything structurally going on with the mix where, over time, you couldn't see your operating margins in that segment gravitate back up to the high teens, where you were, call it several quarters ago?

No.

No, I think we're just hoping that more of these orders get placed, and as capacity gets filled up, that we're able to increase the pricing in the industry. That's what really needs to happen.

I think fundamentally, nothing is occurring that changes our position. As Jay said in the beginning, we like our position in the Subsea Products market.

Okay. And then, just related to the BOP control systems contract, I think I heard you mention four-- I know you guys are doing the two for the Frontier drill ships. Are the other two with those same customers and do you potentially have kind of rework issues with those other two? Or are most of those issues going to be resolved as you get through the back half of the year? It sounded like you were suggesting that would be--

We think these issues are 2008 issues and not related, really, to our projects in 2009. We're confident that our profitability on these projects for next year will improve significantly.

Okay, thanks.

Your next question is from the line of Phillip Dodge.

Good morning; thanks for the comments. Let me ask a question about capacity to respond if there's any hurricane damage this year compared to what it was in 2005. Not the amount of the damage, but what you would have available if work needs to be done.

Well, I think-- we have more capacity now than we did then. So if there was another significant set of hurricanes like we had before, I think we would have even more assets to bear on the problem. With the two big North Sea vessels that we bought in, one last year and one coming here this month in September-- we didn't have those before.

So that's the main difference between now and three years ago.

Yes. (Inaudible) We did build additional saturation diving system and we did bring in a vessel in from our non-oil field performer after the hurricanes and it's been working in the oil field for the last two years. So I think we definitely have additional vessels and additional staff system that we bring to bear on the problem.

Okay. And then, one other thing on the ROV expansion, just to make sure that I understand. You said that you would move forward at about the same rate, but is that the 23 in the second half of 2008, or the 30 for the full year -- the annual?

No, the annual number.

Okay; just wanted to make sure I was (inaudible).

You bet. No, don't overload us, here.

Okay; thanks a lot.

Your next question is from the line of Waqar Syed.

Good morning.

Good morning.

Could you provide a revenue split between OIE and Multiflex in the Subsea Products area?

We're not going to give that out quarterly. For the last (inaudible) years, it's been a 60/40 split.

In the heat given out quarterly--

There's too many--

Too many changes going on. Because we do recognize that that's important, but you have to appreciate that the umbilical business is a little lumpy and we don't want people thinking that it's a permanent mix. So I think if you look at it, it's 60/40. or if you look at it broadly at one-third/two-thirds, we haven't seen much variation from that. So I think Jack's answer of 60/40 is the right way to go.

Okay. And then on the BOP control systems, the cost issue that you have -- are you recognizing the costs as you go, or are the costs, those cost issues, going to be recognized when the units are delivered?

The answer, the absolute answer, to that is yes. We recognize the costs as we go because we recognize them as the component are finished. So there are some costs for components that aren't finished that Jay indicated is going to affect us in the second half of the year. But it has been on an as-you-go on delivery of components. We're not waiting for the entire system to be delivered, but as the components are complete we recognize the costs and the revenue associated with that. Because those are discrete components; and deliverables.

Oh, okay. Now, I got on the call a little bit late, but did I hear correctly that Jay mentioned that the backlog on the product side is likely to remain flat for the remainder of the year?

I think we said that it will not grow as we had expected.

We're not forecasting an increase. It's a lumpy situation and so it's difficult-- we're finding it difficult to predict this backlog.

Okay. So if we go a step forward from that -- if the backlog remains flat, what does that mean for revenues in '09 on the Multiflex side?

Well, let me say that-- let's just take '09 as a general issue. Certainly we expect '09 to be another growth year, a record year of profits for us. We aren't giving guidance out now and we will give guidance at our conference call at the end of the third quarter. Just to reiterate, the things we've talked about so far on the call really relate primarily to 2008, having very little effect on 2009.

We did say earlier that we expect significantly more throughput through our Multiflex umbilical and through our Products business in the second half of '09. So I think that sets us up very well-- I mean, the second half of '08. And that sets us up very well for '09, going forward.

Okay. But for the revenue, the Multiflex side, to increase in '09, the backlog has to increase for the next six months -- would that be a fair statement?

We're expecting increased revenue in Multiflex for the second half of this year based on the backlog that we have now. Maintaining that same level of backlog and continuing that same level of work replacing that backlog in '09 would give us continued growth in '09, even at the same level of backlog. Does that make sense to you?

Yes. Okay; that all for me, thank you.

Thank you.

Your next question is from the line of Michael Morino.

Good morning, Jay.

Morning.

Jay, if I could follow up on that last question in a little bit broader terms -- what do you think the inherent growth rate is within products from an operating standpoint? I mean this year, even with the lower guidance, it's still above 20%. But should we see a reacceleration in 2009 and 2010? I guess it's a matter of when the orders come, but as soon as the orders come, where can we see--?

I think I'm going to have to wait on that question, Mike. Can we wait till our Q3, when we give guidance for-- let us do our budget for '09 and like I say, 19% growth for the year, if we achieve our midpoint, is-- we're certainly not embarrassed by that although we're certainly disappointed that we didn't achieve the home run that we though we could potentially achieve for this year. Let us do our budget and we'll give you some more information at the end of the next quarter.

Is it fair to say that if the orders come, the growth rate will expand from here?

We certainly have capacity to do more--

A lot more work.

To do a lot more work. So I think that's a fair assumption.

Okay. Another question -- I wanted to see if I could get you to comment on some comments made by [Tech Deep] this morning. They mentioned that the subsea market looked like one that needed to be consolidated and they were interested in playing a role. And I was wondering, is there a part of your business that maybe you don't want? Is there parts that you want to grow? Which parts are you looking more at growing and which-- are there parts--?

There's really no part of our business that we don't want. We like the businesses that we're in. We're really trying to grow almost all parts of our business. So we're looking for acquisitions all the time and would be interested in making-- You can see the acquisitions we have made have primarily been in the products business in the last two years. So that's the area of real focus for us is to continue to grow this products area with products and services that fit Subsea.

I think that's-- we've always been interested in ROV acquisitions but there are a limited number of players out there left for us to acquire. We continue to look for a project to use our vessel in the MOPS business and would love to find a project for that vessel.

Inspection business, we made an acquisition last year in the inspection business and are continually looking for smaller inspection companies around the world that we can add to.

I think we're trying to grow virtually all of our businesses. Maybe that's a good answer for your question.

Okay, great. Thanks, Jay, for the color.

You bet.

(OPERATOR INSTRUCTIONS) You have a follow-up question from Stephen Gengaro.

Thanks. Just two quick ones. One, I missed the question that, Jack, you responded 60/40 to on the split. I assume it was between steel and thermoplastics?

No, that was related to the question of could we give any information about the relative size of Multiflex versus OIE revenue? And we said okay, while we don't give that out by segment, you can generally think about Multiflex being 40% and the rest of it, OIE, being 60% as a split for that sector in general terms. That was the answer to that question.

Okay, great. No, that helps. And then-- and I'm going back to this price question, but when you're looking at these umbilical project awards, are you thinking-- are you more worried right now about building the backlog or are you-- So i.e., would you give up some price to build backlog or would you hold firm on price and let a job go by? How do you balance that in this market right now?

We have those debates every day around there and I really can't give you our bidding strategy. Sorry about that; but it's a good question. (Laughter) It's a very interesting question.

Stephen, it does vary job by job. We debate it every day.

And location.

And location. And outlook.

Well, it does help us figure out the margins, though. (Chuckles)

I know.

Okay; thank you for your help.

You bet.

There are no further questions.

All right. Well, thank you very much; we appreciate your attendance on our call.

Take care, guys.

Thank you.

This concludes today's conference call; you may now disconnect.